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Monday
Oct172016

Another Cay Clubs Principal Indicted On Bank Fraud And Tax Charges

A Florida man is facing bank fraud and tax charges for his involvement in the alleged $300 million Cay Clubs Ponzi scheme, making him the third person to be criminally charged in what was one of the largest schemes in Florida history.  David Schwarz, 60, is facing one count of conspiracy to commit bank fraud, three counts of bank fraud, three counts of false statements to a financial institution, and one count of interference with the administration of the IRS.  Each of the conspiracy and bank fraud offenses carries a maximum 30-year term, while the interference offenses each carry a maximum three-year term.  Schwarz has been freed on bond, which interestingly was immediately appealed by prosecutors.  

Cay Clubs Scheme

Cay Clubs operated from 2004 to 2008, marketing the offering and sale of interests in luxury resorts to be developed nationwide.  Dave Clark served as Cay Clubs' chief executive officer, while his wife Cristal Clark served as a managing member and the company's registered agent.  Schwarz served as CFO of Cay Clubs.  Through the purported purchase of dilapidated luxury resorts and the subsequent conversion into luxury resorts, Cay Clubs promised investors a steady income stream that included an upfront "leaseback" payment of 15% To 20%.  In total, the company was able to raise over $300 million from approximately 1,400 investors.

However, by 2006 the company was alleged to have lacked sufficient funds to carry through on the promises made to investors.  Instead of using funds to develop and refurbish the resorts, Cay Clubs allegedly used incoming investor funds to pay "leaseback" payments to existing investors in what authorities alleged was a classic example of a Ponzi scheme.  While the Securities and Exchange Commission initiated a civil enforcement action in January 2013 against Schwarz and others alleging that the company was nothing more than a giant Ponzi scheme, the litigation came to an abrupt end in May 2014 when a Miami federal judge agreed with the accused defendants that the Commission had waited too long to bring charges and dismissed the case on statute of limitations grounds.  

Authorities subsequently filed criminal charges against Dave and Cristal Clark, seemingly unrelated to the Cay Clubs fraud and instead stemming from the Clarks' operation of an unrelated scheme to siphon money from their operation of a series of pawn shops throughout the Caribbean. Several months later, authorities filed bank fraud charges related to the Clarks' interaction with lenders as part of their operation of Cay Clubs - a strategy seemingly designed to ensure the charges would withstand any statute of limitation challenges given that bank fraud carries a 10-year statute of limitations.  

After a five-week trial in Summer 2015, a federal jury deliberated for four days before acquitting Cristal Clark of all charges and deadlocking on the charges against Dave Clark.  After the mistrial, prosecutors retooled their strategy by shifting their focus from the misrepresentations made to investors to the obtaining of loans from financial institutions in creating artificial sales transactions.  After a December 2015 retrial, Dave Clark was convicted on all charges and subsequently sentenced to a 40-year prison sentence.  

Schwarz Charges

In the indictment filed on October 11, 2016, authorities alleged that Schwarz was a 1/3 owner of Cay Clubs and used his relationship with Dave Clark to conspire to divert loan proceeds obtained using straw borrowers and fraudulent loan applications.  The indictment indicates that Schwarz and Clark would use various Cay Clubs corporate entities to orchestrate sales of condominiums to certain Cay Clubs employees and family members. The pair allegedly executed false and fraudulent loan applications, which included representations indicating that cash to close would be provided by the purported borrower to secure the mortgage loan.  The applications also included false information about the straw borrowers' employment, wages, and financial situation.  In turn, the mortgage loans that were extended based on these representations were subsequently deposited into Cay Clubs accounts and used to perpetuate the fraudulent scheme.  

Clark and Schwarz also allegedly shared in the loan proceeds while taking elaborate steps to conceal these distributions.  This included paying Clark's salary to a third party and failing to issue a corresponding W-2 or 1099 to Clark, failing to issue any K-1 to Schwarz or Clark for any of the transfers or distributions, failing to file IRS partnership returns for the Cay Clubs entities, filing false tax returns with the IRS understating their receipts from Cay Clubs, and providing false testimony to the Commission.  

Bond Issues

After Schwarz was arrested in Orlando last week, he appeared before a U.S. Magistrate Judge to ask for a bond governing the conditions of his release.  That magistrate judge entered an order granting bond to Schwarz that was "substantially lower than that requested by the government," providing that Schwarz could use his residence as collateral for the large majority of the $500,000 bond.  The government immediately filed an appeal, taking issue with Schwarz being permitted to use his house as collateral given evidence that Schwarz paid off more than $200,000 of the residence using fraudulent scheme proceeds.  

In their motion, the government reproduced a calculation of the potential sentencing guidelines if Schwarz was convicted of any of the bank fraud charges, indicating that the resulting calculation would be life in prison.  Alleging that Schwarz received a large amount of money that remains unaccounted for, the government requested a $250,000 surety bond with the added condition that Schwarz be required to demonstrate that the source of the funds is legitimate and not tied to criminal proceeds.  According to court notes, it appears that the government reached an agreement with Schwarz' counsel today at a hearing.

A copy of the Indictment and Appeal of Bond Order are below:

 

Schwarz Indictment by jmaglich1 on Scribd

 

 

Bond Appeal by jmaglich1 on Scribd

 

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